August 28, 2017

Cross Waiver of Subrogation in Construction Contracts

Written By

J. Herbert Davis
Member, Stoll Keenon Ogden PLLC

Previously I wrote about a case in which the project owner, under the AIA standard contract documents, carried builder’s risk insurance on a project and the contract contained a cross waiver of subrogation. The Indiana Court of Appeals held that the duty to insure on builder’s risk applied only to the “Work” and that therefore the cross waiver applied only to damages arising out of damage to the Work. It found that in puncturing an underground diesel tank the contractor damaged something that was not part of the Work, so the owner was not bound by the cross waiver (which applied only to the Work) and the owner could file a claim against the contractor for the environmental damage when it was discovered that the environmental coverage under the builder’s risk policy was inadequate. 

Since then, though, another case was decided that also involved non-Work. This time, a fire destroyed not just the Work, but also the contents of the building in which the Work (a renovation) was being performed. The AIA contract provided that the owner could either buy builder’s risk insurance, or it could defer to the contractor to buy the builder’s risk and add the cost of the insurance to the contract after notice by the owner that it did not intend to buy it. Here, though, the owner had other insurance that it felt covered the projects so it did not buy the builder’s risk insurance and, thinking itself fully covered, did not notify the contractor that it was not buying builder’s risk insurance. A fire destroyed the Work and also the contents of the building on which the Work was being performed (the contents being the non-Work), and the insurance did not cover all of the loss. When the owner (believing the contractor and/or a sub caused the fire) sued the contractor and subs for the excess of the loss over the available insurance, the owner argued that since the loss was to non-Work, the cross waiver contained in the contract did not apply so that the owner could proceed against the contractor and subs. Here, however, the Indiana Court of Appeals abandoned its history of using the minority approach of limiting the cross waiver to the Work, in favor of adopting the majority of states approach which holds that the cross waiver applies to all damages, not just those to the Work itself – so the owner’s claim against the contractor in this case failed.

These two cases were decided by different panels of the Indiana Court of Appeals. They appear to be conflicting so that the law on this question is not now well-settled. With the conflict between the Courts of Appeals, it is likely that the Supreme Court of Indiana will at some point intervene to resolve the conflicting decisions. Until then, contractors and owners must carefully negotiate, fully understand and closely follow the language of their contracts regarding duty to insure and cross waiver of subrogation, refining the contract language if necessary so that everyone is clear on who must insure what and for how much.  If/when the Supreme Court gets involved to resolve this, we will report further.


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